Is SIMPLE Thinking for SIMPLETONS or How Did Wells Fargo Pull Off Opening 2,000,000 Fraudulent Bank Accounts
G-II Varrato II
Ret. USAF / VAREP National Legislative Committee Director / REALTOR at Coldwell Banker Realty - Arizona
By: G-II Varrato II
Ret. USAF, REALTOR?
Director Government Affairs VAREP (Phoenix Chapter) 2016
[email protected] / [email protected]
As the latest Wells Fargo financial debacle unfolds across news feeds all over America, we… the American Consumer, seem to be a bit baffled. How in the world was a bank, and not just any bank, but arguably the largest bank in the United States, pull off such a mind-numbing fraud against, reportedly… 2,000,000 of their customers? Added to this confusing mystery is the DOJ’s investigation that Wells Fargo illegally repossessed 400+ service members’ cars.
We continue to hear many, in the financial sector, rail on the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by ?the 111th United States Congress and signed into law on July 21, 2010 by President Obama. Much anger is advanced over the 848 page act/law, by many in the financial sector. And while it is true that a logical argument can be made that some of the Dodd-Frank Act is an ‘over reach’ in trying to impose regulations that are intended to defend against the misbehavior of the bad actors who were central characters in the financial meltdown. It is equally true that there is no ‘single’ causal actor who can be pointed to as THE reason the mortgage market and overall economy took a nose dive, causing the “GREAT Recession” of the 2000s.
A very strong argument can be made that moral hazard played a major role in the birth of the financial crisis. Sadly, moral hazard, played a dramatically dominant role in how banks, financial institutions and Wall Street behaved and how they continue to behave today. RISK is simply a ‘dollar and cents’ extrapolation that is considered. Is the risk-taking that is being pondered going to produce a financially successful outcome and can an unfavorable result of that risk-taking be offset to another person, persons or entity, causing them to bear the brunt of all or most all of the negative consequence that results from a failed or questionably illegal action or activity of the ‘risk taker’?.
The most recent escapades of Wells Fargo may be a perfect full embrace of the concept of ‘moral hazard’. Consider the following concept of weighing risk vs. reward.
2,000,000 checking accounts at $12 per month yield $24,000,000 and it estimated that this fraud continued for 5 years. Therefore the full depth of the profits from the fraudulent activity could have grossed Wells Fargo nearly $1,440,000,000.
Consider that an overdraft fee costs $35. What if each of these two million accounts experienced only two overdraft fees each month. The fees charged by Wells Fargo could build a wonderful gross revenue stream of $140,000,000 per month. And if these overdraft fees continued for 5 years, the immoral dollar haul could be upward of $8,400,000,000.
The total possible gross revenues could top nearly $10,000,000,000 (Ten Billion Dollars)
So now let’s extrapolate Risk vs. Reward. If Wells Fargo wagered that, at worst they would receive a ‘slap on the wrist’ fine, then the reward far outweighed the risk. Wells Fargo was fined only $180,000,000. Do the math, that is potentially only 1.8% of their nearly $10,000,000,000 haul. Not a bad reward for taking advantage of unsuspecting customers and consumers of the Wells Fargo Product.
Does the fact that Congress is considering breaking up Wells Fargo because it appears to be either too big to manage or too big to regulate truly seem that far from a logical solution?
This simply seems like "Deja Vu All Over Again”
**INVESTOPEDIA WROTE, in part, on May 5th 2015
· One example of a moral hazard leading up to the 2008 financial crisis was financial institutions’ expectations that regulating authorities would not allow them to fail due to the systemic risk that could spread to the rest of the economy. Financial institutions holding the loans that eventually contributed to the financial crisis were often some of the largest and most important banks to businesses and consumers. There was the expectation that if a confluence of negative factors led to a crisis, the owners and management of the financial institution would receive special protection or support from the government. There was the presumption that some banks were so vital to the economy, they were considered “too big to fail.” Given this assumption, stakeholders in the financial institutions were faced with a set of outcomes where they would not likely bear the full costs of the risks they were taking at the time.
· In the years leading up the crisis, it is commonly assumed lenders underwrote mortgages to borrowers using languid standards. Under normal circumstances, it is in the best interest of banks to lend money after thoughtful and rigorous analysis. However, given the liquidity provided by the collateralized debt market, lenders were able to relax their standards. Lenders made risky lending decisions under the assumption they would likely be able to avoid holding the debt through its entire maturity. Banks were offered the opportunity to offload a bad loan, bundled with good loans, in a secondary market through collateralized loans, thus passing on the risk of default to the buyer. Essentially, banks underwrote loans with the expectation that another party would likely bear the risk of default, creating a moral hazard and eventually contributing to the financial crisis of 2008.
My bottom line is just this. The ‘pin-prick’ fines that have been levied against the Big 5 Banks for their past and continued transgressions against consumers and their clients are immorally insufficient. Heads must begin to roll and people must begin to be held accountable for their criminal actions. And yes… break up the institutions that are ‘Too Big’ to manage and ‘Too Big’ to regulate because they are truly, Too Big To Be Allowed To Fail.
G-II Varrato II Retired USAF. He is a licensed REALTOR? with Coldwell Banker and the current Arizona State Director for VAREP (Veterans Association of Real Estate Professionals)
** How did moral hazard contribute to the financial crisis of 2008?